What is the actuarial investment approach and how can we make sure it works in human services?
This article was originally published on LinkedIn on 1 December 2017
Around the dinner table this week, my teenagers and I have been talking a lot about work. Our conversations have focussed on how much we get paid from the work we do. One of my kids has a few friends who are about to leave high school before year 12, attracted by the lure of full time work. This sparked some speculation about whether that would be a good move in the long run.
A recent study by Lamb and Huo[1] conservatively estimates that young Australians who do not complete year 12 cost the government, on average, $334,600 per person due to increased health, welfare and crime costs along with reduced incomes and therefore tax collected. It estimates a further $616,200 in “social costs” to these young people and their communities, due to the impacts on their lives due to crime and lower incomes.
Now I know these numbers are averages, and that there are lots of connected factors relating to these increased costs, but it does make you wonder how much the government could spend on keeping young people at school until year 12. If successful, not only would the government (and therefore us, as taxpayers) potentially save money in the long term, but young people may also have better lives and social outcomes.
The term “investment approach” (or “actuarial investment approach”) has been increasingly used in government circles over the past few years to describe one approach that can be used to answer these types of questions. So, what exactly is an investment approach to human services? Why are actuaries involved? Who is applying an investment approach and how can we make sure it helps to improve conditions for our society’s most vulnerable people?
What is an investment approach in human services?
An investment approach in human services involves looking at the likely pathways different people take through their lives, along with the associated services they will need from human services agencies, such as health, education, child protection, justice and welfare. An investment approach can also consider social, or non-financial, outcomes of individuals. By considering a wide range of possible costs throughout someone’s whole lifetime, we can get a more holistic view about how much investment could be made to improve outcomes and reduce future costs.
I’ve spoken before[2] about wicked problems in human services. The interconnectedness of risk factors often requires services from multiple government agencies, which can make it difficult to prioritise risk, address issues and improve outcomes for individuals and their families.
For example, in a household where child abuse is occurring, there may be multiple factors such as poverty, domestic violence, mental illness and substance abuse that need to be addressed by different agencies to ensure safety for the children. Australian research[3] tells us that children who have grown up in abusive households are more likely, on average, to experience poorer outcomes as adults, such as lower educational attainment, poorer physical and mental health, more contact with the justice system and are more likely to be dependent on welfare benefits.
Like households, government agencies have limited budgets from which they can allocate resources. Historically, tools such as cost benefit analysis, evaluations, program logics and evidence based programming have been used to make decisions about delivery of human services within individual government agencies. However, as noted above, wicked problems often cross borders of different agencies, which means that we need a cross-government view to be able to effectively prioritise resources based on the total needs of individuals.
In 2015 David Tune conducted an independent review into the Out of Home Care (OOHC) system for NSW. The Tune review found that 67% of programs for vulnerable children and families in NSW have not been evaluated. So how do we know if this expenditure met its intended objectives? The review also found that:
“There is no overarching program logic or framework to guide investment and interventions for vulnerable children and families”
Clearly, further work is required to establish a cross-government view of human services expenditure, as well as a longer-term view of lifetime outcomes and costs, to maximise outcomes for vulnerable people within the government’s budget. An investment approach can help provide information and structure for this work.
What are actuaries and why are they involved?
As actuaries, we are trained to give advice about what to do today, based on our professional view of future conditions. The investment approach was “inspired” by the insurance industry, where actuarial models have long been used to estimate the likelihood and severity of future life events such as illness or inability to work. Analytical techniques have been used to identify those groups of individuals where the cost and likelihood of rehabilitation is cheaper than the cost of paying their long-term claims.
Not only is this approach good for an insurance company’s sustainability, it is usually good for the people who have experienced assistance in their rehabilitation. It can be considered a win-win situation. However, there are key elements required for this to be successful in an insurance context, including:
accurate data,
robust modelling and analysis, and
practical understanding and experience implementing the actions required for successful rehabilitation.
You can see that this approach involves much more than just a mathematical model owned by the actuarial department.
The techniques actuaries employ in the insurance industry can be used as the basis for the modelling component of the investment approach used in human services. Actuaries can use available data and qualitative insights to construct a professional view of future conditions for vulnerable people, which can be used to help inform policymakers in their investment decisions.
The Investment Approach is not just an actuarial model
Building a robust actuarial model requires time and expertise. However, the investment approach is more than just a model.
Imagine you want to save for a deposit on a house. You might decide that a budget will be a great tool to help you save. But, unless your budget is constructed on realistic estimates of your income and expenses AND you stick to the plan, the budget alone will not help you save the deposit.
Similarly, it is important to recognise that construction of an actuarial investment model will only be one part of successful implementation of the investment approach.
Successful implementation of the investment approach will require at least the following:
the use of valid, cross government data,
collaboration across government agencies to understand the population in question and the services they require,
development of an actuarial model that can be used to estimate and analyse lifetime costs and identify possible target populations for interventions,
assessment and prioritisation of possible evidence based interventions,
consistent implementation of investment decisions, and
regular evaluation and monitoring to enable adjustments as required.
Where else has the Investment Approach been used?
The NSW government established the Their Futures Matter[4] reform in response to the Tune review recommendations, which is expected to culminate in the development of an investment approach for NSW children in OOHC. This approach has already been implemented in other jurisdictions.
In 2010 the NZ government commissioned an independent group called the “Welfare Working Group” to conduct a review on welfare dependency. The group looked to the insurance industry for ideas on reform and recommended an investment approach[5].
The Australian actuarial firm, Taylor Fry[6], was commissioned to undertake this work and they have conducted an annual valuation of the welfare benefits for the people of New Zealand every year since 2011. Alan Greenfield leads the team at Taylor Fry who undertake this work and was awarded “Actuary of the Year” by the Actuaries Institute for his pioneering investment approach work with the NZ government. Alan’s opinion piece[7]about the benefits of the investment approach was published in the Australian Financial Review in September 2016.
Further investment approach work has been undertaken for the NZ government in justice[8], social housing[9] and vulnerable children[10]. These are more recent applications, showing how the investment approach can be applied to different areas of government service delivery.
The Australian government has also been inspired[11] by the investment approach work in NZ. In 2015, Patrick McClure was appointed to chair the Reference Group on Welfare Reform, supported by the Department of Social Services. This review recommended[12]that an investment approach should be central to Australia’s future welfare system, working in tandem with other recommendations around simplification of welfare payments. The actuarial team at pwc was commissioned to undertake the baseline valuation of Australia’s welfare system, and in 2016 their first report[13] was released.
How can we be sure it will actually work?
Despite increasing support and application of the investment approach across Australian and New Zealand governments, there are still many people[14] [15] [16]concerned about whether this is a useful and cost-effective approach to making investment decisions in human services.
Some professionals have highlighted concerns about unintended consequences, including negative impacts on those who genuinely need support. Some have validly pointed out that reducing costs does not always relate to improving people’s lives. Some have voiced concerns about whether the actuarial approach is any better than other widely used techniques such as cost benefit analysis. Questions around choice of discount rate inclusion of certain services in the modelling have also been raised. Others are concerned that the government simply wants to save money.
However, a model is a simplified version of reality – its results are only as good as the data used and the professionals who can interpret them. If robust, cross government data is not available, this will compromise the validity of the model’s results. Similarly, the design of the model and scope of included services and costs must be refined collaboratively to meet the needs of all stakeholders involved. It would be entirely inappropriate to build an investment approach model in human services and let the model (or even the actuaries!) alone prescribe policy decisions. The model is a tool to provide information upon which investment prioritisation and decisions can be made. This work must occur in collaboration.
Further, the investment approach is much more than just an actuarial model – it is a cross government approach to collecting and connecting data, building and analysing lifetime cost estimates and outcomes, and using client centred data and projections to make informed decisions about government investment. Will the model be perfectly predictive? Probably not! Will there be winners and losers from this approach? Of course. But will we have a clearer picture about our vulnerable population and their expected lifetime pathways and costs than we do now? Absolutely!
Conclusion
The use of lifetime cost estimates, based on cross government data, combined with sound knowledge of policy and practice, to inform government’s investment in human services makes logical and economic sense. Actuaries have unique skills that can help in the development of an investment approach in human services. However, as human services professionals we must work together to ensure that the investment approach is not simply an exercise in mathematical modelling, but considers the complex needs of humans and their environments, their various lifetime trajectories as well as their likely financial and social outcomes. We must be alert to possible unintended consequences and we must work together to highlight areas for improvement in any part of the investment approach.
The delivery of human services is a complex area involving wicked problems and the investment approach is not a panacea for disadvantage in our society. However, if implemented carefully, an investment approach is a good way to enhance the information available to inform government’s decision making around investment and service delivery to improve the lives of our most vulnerable.
References
[1] http://www.mitchellinstitute.org.au/reports/costs-of-lost-opportunity/
[2] https://www.linkedin.com/pulse/how-can-actuaries-help-human-services-julia-lessing/
[3] Taylor, P., Moore, P., Pezzullo, L., Tucci, J., Goddard, C. and De Bortoli, L. (2008). The Cost of Child Abuse in Australia, Australian Childhood Foundation and Child Abuse Prevention Research Australia: Melbourne, available at https://professionals.childhood.org.au/research-and-advocacy/research
[4] http://www.theirfuturesmatter.nsw.gov.au/
[5] http://igps.victoria.ac.nz/WelfareWorkingGroup/Downloads/Final%20Report/WWG-Final-Recommendations-Report-22-February-2011.pdf
[6] https://www.taylorfry.com.au/
[7] http://www.afr.com/opinion/columnists/the-investment-approach-to-welfare-fixing-lives-and-saving-money-20160911-grdn1i
[8] https://www.justice.govt.nz/justice-sector-policy/key-initiatives/investment-approach-to-justice/
[9] https://www.msd.govt.nz/documents/about-msd-and-our-work/publications-resources/planning-strategy/social-housing-investment-strategy/social-housing-investment-strategy.pdf
[10] http://www.msd.govt.nz/about-msd-and-our-work/work-programmes/investing-in-children/index.html
[11]https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview201516/Welfare
[12]https://www.dss.gov.au/sites/default/files/documents/02_2015/dss001_14_final_report_access_2.pdf
[13]https://www.dss.gov.au/sites/default/files/documents/09_2016/baseline_valuation_results_report_accessible_version_12_july_2016_2pwc._2.pdf
[14] https://theconversation.com/australia-should-think-twice-before-adopting-nz-welfare-model-38105
[15] https://theconversation.com/australia-can-learn-from-the-limitations-of-new-zealands-welfare-reforms-63103
[16] https://www.themandarin.com.au/68346-new-zealand-investment-approach-boon-or-bane/
